The Insurance and Reinsurance Law Review: Latin America Overview
I Introduction 1
The coronavirus pandemic is the immediate challenge facing the world and no region has felt its impact more strongly than Latin America. The pandemic has shone a spotlight on the high debt-to-gross domestic product (GDP) ratio in the region. Together with the continued spread of the virus and concerns over an effective vaccination programme, the economic recovery will be slow.2 There was already a need for financial stimulus to combat income inequality that saw widespread social unrest in 2019 and 2020.
When it comes to doing business in Latin America, there are opportunities for investment and it is important to consider the economic and political situation in each country. Recent years have seen a focus on reducing corruption, increased transparency and judicial reform. Those countries that are able to continue this work and stimulate growth will thrive and there are calls for integration of policy at a regional and international level to combat the challenges that have been magnified by the pandemic.
There is a sense that there needs to be a clear shift in policy to address income inequality, with the UN Economic Commission on Latin America calling it 'the world's most unequal region'. A downturn in the economy would be likely to compound the issues already facing many countries. The two largest economies, Brazil and Mexico, face contrasting challenges: in Brazil, President Bolsonaro is facing a debt crisis and has stated 'the country is broke and there is nothing I can do', whereas in Mexico, President Andrés Manuel López Obrador (AMLO) has ruled out big spending and remains opposed to private investment.
The pandemic has stifled the signs of economic growth that were emerging after a downturn that started in 2010 and worsened in the middle of the past decade, because of numerous factors such as a fall in commodity prices, the Venezuelan political crisis and the Lava Jato corruption scandal in Brazil. The pandemic has added fuel to the fire, with estimates that 45 million people will be pushed into poverty.3
The outlook for the insurance market is linked to the economic challenges, after premiums for 2019 saw a drop of 1.1 per cent in non-life business.4 However, premiums for life business saw a 5.1 per cent increase, owing to a favourable interest rate environment. The picture across the region is varied, with strong growth in Mexico and Peru, in both life and non-life sectors, contrasting with a contraction of the markets in Argentina and Chile.
The insurance penetration rate remained largely unchanged in 2019, at 2.9 per cent, with the highest rate of 4.3 per cent seen in Chile. The average penetration rate is inflated by the 14.8 per cent rate in Puerto Rico, with all other countries, except Brazil, at less than 2.9 per cent. The rise of insurtech and increased digitalisation may provide new solutions able to promote growth in traditional areas such as home, life and motor insurance. There are signs that the pandemic will accelerate progress in these areas, but the economic downturn will only add to the challenge of persuading populations that insurance is a purchase worth making.
Each country has its own, distinct commercial and legal requirements and it remains crucial for insurers and reinsurers to understand these factors when carrying out all functions of business, from underwriting to claims handling. This chapter considers some of the challenges and opportunities facing the insurance and reinsurance markets across the region, as well as the international participants involved in writing Latin American business. It assesses the status of regulatory developments in each of the main jurisdictions, as well as providing a snapshot of how experience of applying these regulations in practice is leading to an increasingly sophisticated legal landscape.
II Overview of the region
In this overview, we describe some of the major economic and political developments over the past year.
In Brazil, Bolsonaro's leadership continues to be tested in the wake of the country's response to the covid-19 pandemic. What is now clear is that Bolsonaro can no longer rely on signs of an economic upturn to support his agenda in 2021, before the next election in 2022. Recent local election wins for centrist political parties put Bolsonaro under pressure to deliver on his promises to overhaul the tax system and the state, for which he will need to find support in Congress.
The collapse of the Fundão dam, Mariana in 2015 and Feijão dam, Brumadinho in January 2019 continue to be considered by international courts.
The Mariana disaster has been the subject of litigation in New York and the United Kingdom. In June 2020, a New York Court approved a US$25 million settlement of a class action lawsuit filed by holders of Vale SA's American depositary receipts against Vale and issued a dismissal order on the case. In November 2020, the UK courts dismissed group litigation brought against BHP Billiton for US$5 billion in relation to allegations over its role in the disaster, stating the proceedings amounted to a 'clear abuse of process'.
In February 2021, it was announced that Vale had signed a settlement with the Brazilian government worth 37.7 billion reais (US$9.1 billion) in relation to the collapse of the tailings dam in Minas Gerais on 25 January 2019. The incident at the mining complex operated by Vale devastated the city of Brumadinho and killed over 270 people. In January 2021, the victims commenced a group action in the German courts, seeking compensation under Brazilian law, arguing that they would not have efficient access to justice in Brazil. This follows a criminal complaint with German authorities against the same entity, Tüv Süd (the German engineering company that had certified the stability of the tailings dam) in October 2019.
The Lava Jato corruption task force was disbanded in February 2021 after seven years spent untangling the web of corruption between the Brazilian government and large corporates such as Petrobras and Odebrecht, which spread across Latin America and further afield. The investigation saw 174 people convicted in Brazil and the implication of 12 current or former presidents across Latin America. What started as a small investigation into money laundering of goods and services supplied to Petrobras has unveiled probably the largest corruption scandal ever known.5
Reforms in Brazil aimed at ending the culture of corruption followed in Peru, Colombia and other countries. In addition, the past five years have seen a spike in the investigation of public contracts and corruption-related litigation, including in relation to directors' and officers' (D&O) policies and surety bonds. The need for protection offered by these products has also risen as companies come under increasing scrutiny and face up to more stringent regulation.
Petrobras settled the bribery and corruption-related securities class action lawsuit in New York in January 2018 for US$2.95 billion. Its auditors, PwC, also settled with pension fund company USS for US$50 million in February 2018, bringing the total value of the class action to approximately US$3 billion. Both Petrobras and USS deny any wrongdoing or misconduct.
On 11 April 2021, Chileans will vote on the selection of a gender equal and diverse 155-member body that will begin work on a new constitution. This follows a landslide vote in a referendum in October 2020 to replace the Pinochet-era constitution. The vote took place one year on from violent protests against income inequality that saw the government declare a constitutional state of emergency between 19 and 27 October 2019. Despite being one of the most stable economies in the region, Chile also has one of the highest levels of income inequality among developed nations.6 The violence forced President Piñera to reshuffle the cabinet and promise a series of referenda on constitutional change. So far, in spite of the challenges posed by the pandemic, the process has been relatively smooth. However, the real debate over how far constitutional reform should go has yet to start.
Inspired by events in Chile, there are calls for a new constitution in Peru to break with the country's authoritarian past. There is also hope for a quick economic recovery driven by investment in the energy and mining industry, bolstered by a rise in commodity prices. In particular, there is a need for investment and modernisation to allow safe and effective operation of the oil and gas industry. The mining sector in Peru accounts for 10 per cent of GDP and the hope is that funds from the growth of this sector can be used for much needed investment in other areas.
The Sagasti-led government continues to suffer from the fallout of the corruption scandal that saw the impeachment and resignation of former president Pedro Pablo Kuczynski in 2018 and forced three presidential changes in December 2020. The latest scandal has erupted over reports that one of the former presidents, Martín Vizcarra, and current government ministers secretly secured vaccinations in the middle of a second wave of the coronavirus pandemic.
Although not on the same scale, mass strikes and demonstrations also hit Colombia during November and December 2019. The National Strike Committee has drawn up a list of 104 points, from dissolving the riot police to completely nationalising state-run oil company Ecopetrol. However, September 2020 saw a return to riots across the country in response to police brutality. There is a growing sense of unrest in the country as President Ivan Duque has failed to push through reform to tackle corruption and security.
On a positive note, there is optimism that Colombia will recover quickly from the impact of the coronavirus pandemic, supported by investment of US$38 billion aimed at expanding internet coverage and supporting small and mid-sized businesses. Construction of the Ituango hydroelectric plant – the country's largest infrastructure project, and worth US$4.6 billion – is making progress again after a catastrophic flooding event in April 2018. However, works continue under the threat of prolonged litigation against the builders, designers and auditors.
Unrest also continues in Ecuador. After the protests against austerity measures in 2019 that saw President Lenín Moreno make a U-turn on the plan to scrap fuel subsidies, early 2021 saw violent prison riots linked to organised crime in the illegal drug trade. The country is now looking to the result of the runoff election that will decide the new president in April 2021. The leading candidate for many commentators is Andrés Arauz, who is supported by former president Rafael Correa. Despite a criminal conviction for corruption, Correa exerts considerable influence in the country's politics. The alternative for voters could not be more stark – Guillermo Lasso is a banker who advocates close ties with the US.
Having agreed renegotiated the terms of US$17.4 billion in sovereign debt and agreed a new US$6.5 billion loan with the International Monetary Fund (IMF) last year, the international community will be watching the result of the election in Ecuador closely. In Bolivia, the conservative interim government, led by Jeanine Áñez, was replaced by the Movement Towards Socialism party in the October 2020 election. President Arce, who previously worked as finance minister under Evo Morales, quickly took the decision to return a loan of almost US$350 million to the IMF.
In Mexico, AMLO enters his fourth year in power and continues to attract controversy. AMLO's election triumph in 2018 came during a wave of political violence targeting many of his supporting politicians (a total of 175 politicians were assassinated between 1 September 2017 and 31 August 2018, according to consulting firm Etellekt Consultores). As anticipated, AMLO has already faced obstacles to his ambitious plans for reform and to 'purify public life', mandating relief for the poor, eradicating corruption and continuing to strengthen currency.7 AMLO has labelled it the 'Fourth Transformation'. His opponents say that, instead, the country has been paralysed by the cancellation of public infrastructure projects, such as the planned US$13.3 billion mega-airport for Mexico City.
In spite of criticism, AMLO has laid out an ambitious programme to nationalise energy production by taking full control of Mexico's two state-owned energy giants, Pemex and CFE. The programme sidelines private investment and ignores renewables, in favour of ploughing public money into the construction of a new oil refinery (Dos Bocas) and enabling CFE to produce its own electricity. The Mexican Supreme Court has called the nationalist energy policy unconstitutional; it also warns that the policy risks breaching several trade agreements, such as the USMCA with the US and Canada, yet AMLO seems set on pushing on with his plans.
The economic crisis in Venezuela continues following a reduction in oil exports, the failing performance of state-owned PdVSA and ineffective currency controls over recent years. The introduction of the sale of oil for 'petro' cryptocurrency tokens has had limited success, with international buyers concerned that they may fall foul of ever tightening US sanctions. EU sanctions against Venezuela continue and the Biden administration in the US appears to be in no rush to ease the strict sanctions regime introduced in 2019. Neighbouring Colombia, Ecuador, Peru and Chile have seen an estimated 5.4 million nationals cross their borders. While many seek to reach the US or Spain, over 2 million have fled to Colombia and there are now 1 million in Peru. President Duque's approach of granting temporary legal status to undocumented migrants has been widely welcomed and is in contrast to the harder-line policies in other neighbouring countries.
The victory of Alberto Fernández in Argentinean elections at the end of 2019 was a surprise for many, with Cristina Fernández returning to power as vice president. The government is struggling to address inflation, which stands at over 38 per cent, as it attempts to come to an agreement with the IMF over debt repayment. The coming year will be challenging as the government also seeks to support the economic recovery from the pandemic – former President Macri's fate was sealed when he failed to secure the support of the IMF for a rescue package.
III Coronavirus pandemic
The varied political picture across Latin America is reflected in the approach to the coronavirus pandemic. The Latin America and Caribbean region is reportedly suffering its largest recession on record, with contraction at 9.3 per cent,8 and the fate of many governments will be determined by how countries recover.
In spite of the criticism levelled at President Bolsonaro in Brazil, the government was quick to create a financial tool to support the most vulnerable Brazilians and contain economic regression with effective employment retention schemes and state-backed credit. The Brazilian Federal Senate has recently submitted a bill to extend the federal government's coronavirus emergency salary programme until 31 March 2021. The vaccine roll-out has been more controversial, with president Bolsonaro dismissing covid-19 as 'a little flu'. The Brazilian Federal Supreme Court reacted in December 2020 by holding that vaccination would be mandatory and that an individual's decision should not override the collective health of the country.
The Guatemalan government led by President Alejandro Giammattei was a leading light in the region for its response to the pandemic, with measures to halt its spread attracting widespread support. The President declared a State of Calamity to limit the free movement and circulation of people and vehicles from 5 March 2020 and established COPRECOVID, the Presidential Covid-19 Emergency Response Commission – a specific committee to advise and assist on all pandemic-related matters. Unfortunately, a financial support package was not sufficient to prevent high unemployment in both the formal and informal economies. Guatemala already has one of the highest levels of informal economy in the world (approximately 75 per cent), and this is expected to grow to 80 per cent in the aftermath of the pandemic, with a significant impact on tax collection.
According to official statistics, Peru, Mexico and Panama were the three Latin American countries most impacted by the coronavirus pandemic, with mortality rates at 118.08, 100.81 and 99.12 per 100,000 inhabitants respectively as at 4 January 2021.9 While death rates in Venezuela, Nicaragua and Cuba appear relatively low, at 3.58, 2.55 and 1.3 per 100,000 inhabitants respectively, this is likely to be attributable to under-reporting as opposed to good public health and social welfare practices. In the case of Ecuador, the New York Times has even suggested that Ecuador's actual death toll is 15 times higher than its official tally, the result of an overwhelmed healthcare system and political mismanagement.10
As at February 2021, Chile was the Latin American country with the highest rate of covid-19 vaccination. It had administered 15.12 doses per 100 inhabitants – far in excess of Brazil in second place at 3.27 doses per 100 inhabitants. Due to economic problems and the spread of the pandemic, many countries in the region were involved in clinical trials for numerous vaccines, including the Russian Sputnik V and Chinese Sinovac and Sinopharm shots. Chile's success so far is down to securing vaccines from a range of suppliers, thus allowing it to emerge as a world leader in covid-19 inoculations.
IV Natural disasters and major incidents
In addition to political and economic challenges, Latin America faced multiple man-made and natural disasters during 2019, including hurricanes, flooding and droughts.
The combined forces of Hurricanes Eta and Iota in November caused economic losses in Central America alone estimated at nearly US$7 billion, with the vast majority of these losses uninsured.11 As at 30 November 2020, the Guatemalan Insurance Association (AGIS), had documented 1,005 claims in relation to floods and mudslides equating to US$31.4 million due to the Eta storm and 120 claims amounting to US$1.4 million for the Iota storm.
There were barely two weeks between the two hurricanes hitting, which compounded the damage to the region. Significant flooding was experienced in mainland Colombia, catastrophically impacting the islands of San Andrés and Providencia. Government officials estimated that 80 per cent of homes on Providencia were destroyed and 98 per cent of all structures impacted. Total economic losses as a result of associated cyclones, high winds and rainfall are anticipated at US$100 million.12
Mexico also faced wind loss damage amounting to US$300 million caused by Hurricane Delta in October 2020 in the middle of mobility restrictions due to the coronavirus pandemic. Approximately 200,000 people were left without power.13
Elsewhere, agriculture in Brazil, Argentina, Uruguay and Paraguay has been affected by drought, with estimated losses in Brazil reaching US$3 billion.14 In a major heatwave across the region in early October, with Brazilian municipalities Nova Maringá and Água Clara reaching 44.6˚C,15 wildfires spread across large expanses of the Gran Chaco forest, the Brazilian and Bolivian Amazon forest and the Pantanal wetlands in Western Brazil. By the end of October 2020 in Bolivia, 2.3 million hectares of forests and grasslands had burned with economic losses across the countries affected projected to be hundreds of millions of dollars.16
There are clear opportunities for insurers and reinsurers to address the huge protection gap in the region, which is reflective of stubbornly low insurance penetration. Recent research by AON suggests that US$8 of every US$10 of losses due to natural disasters are uninsured.17 The research showed that the largest loss events in 2019 were all weather related, with total economic losses for Latin America, the Caribbean and Canada of US$19 billion.
In April 2020, Ecuador suffered its largest oil spillage for 15 years. A landslide ruptured three pipelines and 15,800 barrels of crude oil spilled into the Coca River, contaminating the water supply relied on by 120,000 people, largely in the region's indigenous communities. Critics point to the process of river fragmentation and subsequent soil instability triggered by the construction of the Coca Codo Sinclair hydroelectric dam in 2016.
Countries need to balance the need for investment in infrastructure with environmental concerns, particularly in the petrochemical and mining sectors. There is a clear incentive for countries to invest in renewable energy and Chile has implemented a road map to decarbonisation by 2040. At the UN Climate Conference in December 2019, a regional initiative coordinated by OLADE, the Latin American Energy Organization, set an ambitious regional target of reaching at least 70 per cent of renewable energy in electricity by 2030. Open pit mining is currently banned in Costa Rica and El Salvador.18 However, Costa Rica faces an international arbitration claim for the impact on investment at its Crucitas mine and is under pressure to allow a return to limited activity.19
Chile saw the creation of specialist environmental courts in 2012,20 together with increased regulation for operations affecting the environment. This additional scrutiny comes following the severity of the 2017 wildfires and ongoing 'mega-drought' in central Chile. The Financial Market Commission (CMF) is now consulting on the introduction of laws that will require companies to report on their carbon footprint and environmental impact. In turn, there is a growing demand for environmental insurance products that will respond to the broad range of exposure faced by insureds in all sectors.
Regulation in insurance and reinsurance continues to develop in many of the main jurisdictions. Following the advances of the past decade, a diverse group of markets exists, each with a distinct identity. Each regulatory regime should be considered in its own right, prior to underwriting risk in the country. The year 2020 saw the market adapt to the coronavirus pandemic, with regulators in various countries issuing guidance on the response to related claims. There are opportunities for insurers and reinsurers to provide solutions at all levels of the market, from political risk and surety products to innovation in life, motor and home insurance.
The regulation of the Chilean insurance market is among the most sophisticated in the region. The Chilean securities regulator, the CMF, operates as an independent, prosecutor-led investigation unit for financial markets following its devolution from the Superintendence of Securities and Insurance on 15 January 2018. The revamped regulator is intended to enforce compliance with legislation, facilitating the operation of market agents in a manner that protects public confidence.
Following the civil unrest in 2019, commercial premiums for property policies have doubled and insurers have introduced exclusions for 'strikes, riots and civil commotion'.21 In many property policies, cover for political violence had become automatic, because of soft market conditions and the view that Chile was low risk.
In response to the pandemic, the CMF confirmed that its current regulations allowed insurance companies to include pandemic and epidemic exclusions in insurance policies. As is common practice, insureds would need to have been clearly informed of any coverage limitations at the time of contracting the insurance. Brazil went a step further in seeking mandatory life insurance cover for deaths resulting from epidemics and pandemics.22
The Peruvian regulator confirmed that covid-19 would be covered by existing health and life policies, unless expressly excluded. Even before the pandemic, there had been a review of the compulsory life insurance scheme for employees, following the death of two young workers in a commercial kitchen explosion. This led to the creation of a system for expeditious support and compensation for work accident injuries, including natural and accidental death.23
In Guatemala, according to AGIS, by August 2020, 2,872 claims relating to covid-19 had been accepted by insurance companies, representing payments of more than US$12.2 million, under health, life and unemployment coverage policies. By September 2020, this had increased to 4,233 cases, representing US$15.8 million. The highest medical expenses claim paid was approximately US$192,500, with US$243,700 paid in relation to life insurance.
The Colombian insurance regulator formally instructed insurers to liaise with their insureds, to personally inform them about mechanisms being adopted to reduce their premiums while risk exposure had diminished as a result of preventative measures employed in response to the pandemic.24 Reimbursements, extensions and renewal options on automobile, aviation, hull and marine, third party liability, machinery breakdown and contractors' all risks policies were all considered.
The local and international insurance and reinsurance markets have also continued to follow developments in Colombia closely, particularly with regard to the Comptroller General of the Republic (CGR). By way of Constitutional Amendment No. 355 of 2019, which was approved in September 2019, the CGR gained new powers to take proactive and preventative measures to guard against the misuse of public funds.
There is recognition across the region of the need to target corruption and to address the challenges posed by data privacy and climate change.
Following years of financial scandal in Brazil, development of the country's anti-money laundering regulations continues to progress in Brazil. The Brazilian Superintendence of Private Insurance (SUSEP), the National Superintendence for Pension Funds and the National Agency of Supplementary Health have safeguarded their decision-making independence and will operate as separate entities in 2020, despite government downsizing rumours last year. New legislation has established various working groups and committees to identify the national risks associated with money laundering, terrorist financing and the proliferation of weapons of mass destruction financing, and also to combat corruption within the federal administration.25
Brazil's General Data Protection Law (LGPD), which closely aligned with the General Data Protection Regulation formulated by the European Union,26 came into force in September 2020, although administrative sanctions will not be effective until 1 August 2021. The LGPD must be observed in all data processing operations carried out in Brazil, as well as in foreign processing of personal data collected in Brazil or relating to individuals in Brazil. Breaches of the LGPD may lead to fines of 2 per cent of annual revenue, subject to a maximum of 50 million reais, and administrative sanctions, such as suspension of data processing activities.
Brazil currently ranks second in the world for ransomware attacks and has recognised the need for stronger legislation in its cyber security strategy, with a cybersecurity bill on the way. In November 2020, a ransomware attack disabled the Superior Electoral Court's systems for over two weeks. There is a clear need for investment in cybersecurity, but recent data shows businesses in Brazil and across the region are reluctant to invest at a time when they are facing economic challenges as a result of the coronavirus pandemic.
On 28 June 2019, Argentina issued a decree allowing businesses or individuals carrying out activities that pose a risk to the environment to take out surety insurance for environmental damage.27 The requirement for mandatory environmental insurance has been in force since May 2017,28 to guarantee the availability of funds to restore the environment, regardless of whether damage has occurred as a result of a sudden or accidental event.
The state would assume the role of the beneficiary of the surety insurance, whereas typical liability products see the state acting as the third-party claimant. Insurers and reinsurers offering public liability insurance should therefore check that cover for pollution liability aligns with these mandatory requirements and any other insurance held by the insured. There are also strict restrictions on policy limits and excesses for environmental insurance and, more generally, for the insurance of public risks.
The economic challenges described in Section II of this chapter, combined with the need for investment in large infrastructure and construction projects, means that governments are likely to look to surety bonds to guarantee the completion of such projects. Insurers considering whether to act as surety in these projects must assess the local regulatory environment, particularly in the context of the fallout from the Lava Jato scandal in the region.
In March 2018, Peru approved Law No. 2408, ensuring that civil damages due to the state are immediately payable in corruption-related circumstances, and preventing paralysis of public and public–private partnership works. The new Law obliges offenders to establish a compliance programme and to meet international standards. The passing of this Law provided that bond letters and surety bonds guaranteeing obligations to the Peruvian state would be honoured by those associated with the Odebrecht scandal.
Premium collections on surety bonds in Brazil increased by 8.9 per cent during 2018 (amounting to 2.44 billion reais), but continued growth will largely be linked to the country's economic fortunes and projects in the infrastructure and energy markets. Discussions over a new bidding law29 and an amendment30 aimed at simplifying public procurement gained preliminary approval from the House of Representatives in June 2019. If agreed by the National Congress, there will be an online portal for public procurement and requirements for long-term planning and approved supplier lists.
The regulation of reinsurance also continues its evolution in the region, with the markets in Argentina and Brazil continuing the relaxation of protectionist policies. In Mexico, nationalist policy threatens to affect the insurance and reinsurance market in the same way it has the energy sector (see Section II), with talk of the creation of a state-controlled reinsurer entering the market.
There has been a marked shift in the regulation of the Argentine insurance and reinsurance market since 2015, with the arrival of a new administration that signalled a move away from the interventionist approach consistent with the nationalist policy at the time. In 2017, by way of Resolution 40,422, the Argentine insurance regulator signalled the relaxation of regulations on foreign reinsurers admitted to provide reinsurance for risks placed in the Argentine market. As of 1 June 2019, admitted reinsurers can compete with local reinsurers for 75 per cent of all risks. However, the prospect of entering a market that has been problematic for international reinsurers has been viewed with caution, which is underpinned by the current economic uncertainty and recent experiences of unpredictability in the interpretation of Argentine insurance and reinsurance law.
It is also now possible in Argentina to use electronic means to comply with deadlines to deliver policy documentation to the policyholder within 15 working days of the signing of the contract. The issue of Resolution No. 219/2018 in March 2018 provides a more reliable and cost-effective method of delivery.
The relaxation of the rules regulating the Brazilian market continued in 2019 with Decree No. 10,167/2019. The new rules allow insureds to cede 95 per cent (a significant increase on the previous maximum of 10 per cent), based on gross written reinsurance premiums in a calendar year, to 'occasional reinsurers'. Similarly, 'local reinsurers' are now permitted to transfer up to 95 per cent of risk (based on the same measure), which is an increase on the previous 50 per cent restriction. Occasional reinsurers need only be registered with SUSEP, without requiring a representative office in Brazil. With rates hardening in Brazil after recent losses, and the regulatory environment developing, there are opportunities for reinsurers at the top end of the market.
The growth in insurtech has been encouraged through the pandemic, with more insurers offering access to home and life policies through online platforms, providing to a market that had previously been difficult to reach. Examples of local innovation are found in Chile, with comparison website ComparaOnline and artificial intelligence-powered claims-processing company LISA, and in the Dominican Republic with Contigo (a product that facilitates access to health insurance). There are also many adopters of 'pay per kilometre' insurance models, such as miituo in Mexico, which seeks to address the low uptake of motor insurance.
Cyber insurance is another product undergoing growth in a region where 92 per cent of banks were subject to a cyberattack in 2018. Similarly, in support of much needed investment in construction and infrastructure projects, surety and trade credit insurance, often placed via reinsurance arrangements in international markets, provide specialist support for investors and banks. There is also growing popularity for parametric insurance products as a solution to the impact of catastrophic and climate-related risks. Many established insurers are cautious about developing new products or changing their operating models, which creates opportunities for new market participants.
In most Latin American countries, there are strict requirements applicable to insurance and reinsurance companies. For example, in Peru, solvency restrictions are dependent on whether a company operates in life or general risks, or insurance or reinsurance. Minimum capital limits reach almost US$3.1 million for reinsurance companies, roughly US$6.8 million for insurance companies and approximately US$5.1 million for those operating in both markets. Mexico introduced Solvency II type regulations in 2016, with Chile, Brazil and Colombia all implementing a risk-based capital scheme to some extent. In all cases, it is vital that an insurer or reinsurer seeking to make an international move considers the requirements of the specific market. This is not an environment where one size fits all.
VI POLICY INTERPRETATION AND DISPUTE RESOLUTION
In Latin America, laws affecting policy interpretation may be found in a variety of types of legislation, from civil codes and codes of commerce to financial regulation and regulatory guidance. In many jurisdictions, there is specific legislation on insurance, which tends to focus on protection of the insured.
It is important for insurers and reinsurers to provide very clear policy wordings, in compliance with local regulations, and to take active involvement in managing claims from an early stage. In recent years, because of the increased use of arbitration and signs of a more sensible approach by the courts in some countries, there is a noticeable trend towards more commercially and technically sound decisions, as well as sensible discussion with the insurance regulators.
The overarching objective of Chile's insurance contract law31 is to protect the insured, regardless of its status or size. There is a general prohibition on insurers altering the wording of registered policies in any way that does not favour the insured. Although the 2013 Insurance Law is not mandatory for policies with a premium above 200 indexed units of account (UF),32 it is influential on the way risks (irrespective of their size) are written. There may also be times where a fronting operation for the facultative reinsurance of a large risk does not meet this requirement.
In a recent important decision for the liability market, the Chilean Supreme Court clarified that it is the date of the manifestation of damage or injury that will trigger the four-year limitation period, as opposed to the date of the defendant's act or omission. It is worth noting here that, in cases of 'environmental damage', there is a special limitation period of five years from the date of damage.33
At the beginning of 2017, legislation was issued in Peru that stated that institutional arbitration must be used to resolve all disputes that arise from state contracts for the purchase of services and goods.34 Chile went one step further by providing for the automatic arbitration of large disputes (above 10,000UF), and for arbitral awards to be filed with the regulator.35
Substantial progress has been made in Brazil in recent years, with arbitration agreements now permitted in adhesion contracts (such as insurance policies) providing that the specific clause is expressly executed by the insured to demonstrate agreement. This has resulted in a rise in the number of both domestic and international arbitration cases. However, the draft Insurance Law bill36 threatens to impede foreign arbitrations by establishing that all forms of conflict resolution involving contracts entered into in Brazil, Brazilian domiciled insureds, assets located in Brazil or interests over assets relevant to Brazilian infrastructure must be performed in Brazil with the exclusive application of Brazilian law. If the law is passed, this would represent a step backward in the reduction of protectionism demonstrated by the Brazilian state in recent years as it has sought to establish the country as a reputable and competitive arbitration centre for external, and higher-value, disputes.
Following enactment of the new Brazilian Code of Civil Procedure in 2015,37 the reasoning in decisions of the Brazilian Superior Court of Justice38 (STJ) may be binding on lower courts. In 2019, the STJ provided some clarification on the interpretation of the three-year limitation period for claims for 'compensation' under Article 206 of the Civil Code. The STJ stated that this provision applies only to claims alleging liability in tort and therefore claims in contract are subject to a limitation period of 10 years. This clarification is helpful for insurers and reinsurers writing civil liability insurance products for Brazilian insureds. The decision is part of a trend of the Brazilian courts towards a more technical interpretation of insurance policies, based on the wording as opposed to an overwhelming need to find in favour of the insured.
As a reflection of the less partisan approach to the insurance industry in Argentina, the Supreme Court confirmed in July 2020 that court judgments could only be enforced against an insurance company within the contracted limits. This is a welcome move for insurers and reinsurers, particularly in relation to liability insurance cover, following much uncertainty in relation to a willingness by the courts to overlook the express terms of insurance policies in Argentina. There are also signs that the judicial backlog is clearing, with records registering a 8.2 per cent reduction in June 2020, reflecting a rising preference for arbitration and early settlements.
In Colombia, arbitral awards already form part of a significant body of case law relating to the interpretation of insurance contracts. However, there is no clear rule establishing the confidentiality of arbitration awards. The Colombian courts, particularly the Supreme Court of Justice (SCJ), provide a reliable source of clear guidance on the interpretation of insurance policies. In a decision in November 2020, the SCJ attributed personal responsibility for terrorist attacks that are 'to be expected' in the context of social unrest. The SCJ held that Club El Nogal was liable to pay plaintiffs material and moral damages arising as a consequence of an attack at the defendants' facilities in 2003.
The Colombian Constitution provides a mechanism, known as a 'tutela', that allows a party to seek the protection of fundamental rights where these have been violated by the act or mission of any public authority.39 Following such an application, the SCJ recently gave its judgment on the effectiveness of exclusions in a third-party liability policy.40 The SCJ said the appeal court had been wrong to allow the insurer to rely on an exclusion contained in a separate document titled 'General Conditions Forming Part of the Policy'. In accordance with Article 44 of Law 45 of 1990, policy exclusions must appear clearly on the first page of the policy.
As with many jurisdictions, there is less understanding of insurance in the lower courts and within government institutions, as borne out by the uncertainty that has been created over claims-made policies by some decisions adopted by the CGR, the government authority in charge of fiscal control in Colombia. The CGR deemed claims-made clauses to be disproportionate, or abusive, and stated the view that the Colombian Commercial Code and Law 389/1997, which regulates insurance contracts in Colombia, were not applicable in fiscal liability proceedings.
After a period of consultation, the CGR revoked one of its more criticised decisions in November 2019 and recognised the operation of claims-made clauses. However, following subsequent contradictory decisions made by the CGR, the Ministry of Finance issued a directive explaining how claims-made clauses operate and determining how the CGR is to apply these provisions in the future.41 The Ministry of Finance reiterated the validity of claims-made clauses and highlighted that for applicable policies the policy period to be triggered will be the period in effect at the time the opening writ is issued.42 Any relevant fiscal liability proceedings must then be started within 10 years (with an additional five years applicable from when the opening writ alleges fiscal liability to attach), although the liability of insurance companies will be limited to the risks determined in their contracted policies. This clarification is useful to reinsurers that may be joined to fiscal liability proceedings.
In recent years, Peru has sought to establish provisions on the personal liabilities of specific officers in public and private entities. For example, a 2018 tax ruling provides for the personal liability of private sector officials designing, approving or executing tax planning intended for avoidance. This new liability scenario is considered an attractive opportunity for the placing of D&O policies, given the risk to which officials are exposed and the demand for cover of administrative fines and defence costs.
The Peruvian regulator, the Superintendency of Banking, Insurance and Private Pension Fund Administrators (SBS), came under pressure from local and international insurers and reinsurers for its statement in October 2018 that claims-made policies were not permitted under Peruvian law and would be declared null.43 The opinion was based on a strict interpretation of the Peruvian Insurance Contract Law;44 specifically, the description of the trigger for civil liability policies as being the occurrence of the harmful act, within the policy period. The SBS reconsidered its position and statutory law SBS No. 3695-2019 was passed on 19 August 2019. This law recognises that civil liability policies may respond to third-party claims made within the policy period or extended reporting period.
The debate over claims-made policies continues in Argentina, where judges have held claims-made policies to be abusive in 11 of 13 cases ruled on the point. Although it is notable that all such cases were brought by third parties against insureds who had taken out civil liability insurance on a claims-made basis, it has been suggested that claims-made policies will only be enforced where the insured is a legal entity rather than an individual.
The Mexican courts are developing principles in liability cases, in accordance with the provisions of the Civil Code, that allow judges discretion to determine the level of moral damages.45 The courts will take into account the severity of the claim, the financial position of the defendant (including whether insurance is available) and the needs of the victim to calculate an amount that protects the right to full and just compensation.46 The lack of any system of precedent means that court judgments in this regard are unpredictable, but there is a clear trend for increasing moral damages awards, which may also recognise a punitive element in federal courts. The ability to award punitive damages was first recognised by the Supreme Court in a 2014 judgment47 for 30 million Mexican pesos against the Mayan Palace Hotel after a guest drowned in the hotel's artificial lake.
The Mexican Federal Civil Code was amended in January 2018 to alter the measure and restatement units48 applicable for calculating compensation to victims of personal injury, with the effect of reducing the basis for this calculation to 25 per cent of that previously anticipated. These changes will reduce compensation available in federal courts, which hear claims against public entities, but will not affect the calculation of damages in cases before the civil courts.
If passed by the legislature, the Brazilian draft Insurance Law bill49 would distinguish large risks from other insurance.50 If approved by the National Council for Private Insurance, this fundamental change would be welcomed by the international reinsurance market and may be necessary to attract much needed capacity, following recent large losses.
The draft bill also proposes an overhaul to the claims adjustment procedures in Brazil currently regulated by SUSEP. For example, a claim would be considered covered if partial or total consideration passes between insurer and insured, or if a denial of cover fails to contain reasoning. Additionally, the deadline for a reinsurer's response to a request for cover would be stipulated as 10 days. Currently, Brazilian legislation also allows 30 days for the conclusion of a loss adjustment, counted from the date on which all the relevant documents have been provided by the insured to the insurer. Failure to comply with the period will result in the tacit acceptance of cover.
In Peru and Chile, the rules around the adjustment of losses provide for a strict timeline that directly affects insurers. The rules in Peru51 provide for 30 days, from the delivery of complete documentation, for insurers to respond to a claim. Any request for additional information must be made within the first 20 days, even where a loss adjuster has been appointed. In Chile, insurers must make any challenge to a loss adjuster's final report within 10 days. In both countries, failure to comply with these periods will be taken as an acceptance of cover.
A similar 30-day rule in Mexico puts an insurer at risk of paying interest or being subject to fines or sanctions. In Colombia, insurers that fail to respond to claims (in which the insured has duly accredited the occurrence and amount of the claim) within one month may face expedited judicial proceedings and interest on arrears (of approximately 30 per cent).
VII Development of reinsurance law
The continued liberation of local reinsurance markets in Latin America during the past few years has been a welcome development in a region that has traditionally been underserved. Asian and eastern European reinsurers are now also seeking the potential growth that the region has to offer and are increasing their exposure to Latin American risks.
The demand for reinsurance cover for infrastructure and energy projects, life and health products, cyber and insurtech, as well as D&O and property and casualty, is expected to grow in 2021 as the region looks to recover from the coronavirus pandemic.
Insurers in most jurisdictions are permitted to cede 100 per cent of their written risks to foreign carriers, with some exceptions for certain lines of business. However, there is no clear, established body of law on the interpretation of reinsurance contracts.
Whether the provisions of the Brazilian Civil Code apply equally to reinsurance contracts as to insurance contracts remains an area of continued debate. Many Brazilian lawyers consider that the provisions in the Civil Code are limited to insurance contracts. Others consider that the Code applies to reinsurance by analogy. The latter view reflects the approach in Colombia and Argentina, and now appears to be supported by the Brazilian draft Insurance Law bill, which continues to make slow progress through Congress. This remains an area where clarification of the law or comment by SUSEP would be welcome.
There is similar discussion in Mexico over the law applicable to reinsurance contracts. Although it is largely accepted that reinsurance contracts are subject to the general rules applicable to commercial contracts in the Civil Code, some argue that the Insurance Contract Law also applies to fill in any gaps left by the terms of the reinsurance contract. This view runs counter to allowing parties autonomy to agree to the terms and conditions of the reinsurance.
The new Ecuadorean Commercial Code entered into force on 29 May 2019; it includes rules on the regulation of insurance contacts in Book Six (Article 690 onwards). In Article 794, there is express recognition that rules relating to insurance will also apply to reinsurance contracts by default, but with the option for the parties to expressly contract otherwise.
Peru and Chile are two of the few jurisdictions where insurance law includes a definition of reinsurance, including recognition that reinsurance is independent of the underlying policy. It seems that the modernisation of the insurance regime and increased sophistication of the market (particularly in Chile) have entrenched the view that reinsurance is expected to respond as an indemnity policy for the reinsured. This is in contrast to the traditional position in the law of England and Wales, which recognises reinsurance as a separate insurance of the underlying insured risk.
Chilean law52 provides for the need to determine the reinsurer's obligation to indemnify the reinsured in the context of the terms and limits established in the reinsurance contract. It also recognises the benefit of looking to 'international custom' when interpreting reinsurance contracts, although this provision remains largely untested.
Peruvian contract law defines reinsurance53 as obliging the reinsurer 'within the agreed limits' to meet 'the debt that arises in the patrimony of the reinsured as a consequence of the obligation assumed by it as the insurer under the contract of insurance'. It is difficult to reconcile this statement with the separate recognition of autonomy between insurance and reinsurance, which states the general prohibition on the payment of an indemnity under the original policy being conditional on the relationship between the insurer and reinsurer.54 The simple explanation is that the aim of this provision is to prevent insurers from deferring to reinsurers as an excuse for late payment, although there is now an exception to this rule.
In most countries, local insurers are not permitted to delay payment under a policy while they wait for reinsurance funds to become available. In Peru, however, new rules for taking out reinsurance and co-insurance via fronting arrangements entered into force during 2018. These rules allow insurance companies to incorporate a clause into insurance and reinsurance contracts that allows the insurer to pay a loss when the reinsurer pays (i.e., 'pay when paid' provisions). This clause may only be agreed in fronting operations when the insurer transfers 100 per cent of the risk and highlights the importance of ensuring that the underlying policy is aligned with the reinsurance in back-to-back reinsurance.
Colombia has one of the most sophisticated bodies of law on insurance and reinsurance, including helpful guidance from the Supreme Court of Justice. The Colombian Commercial Code and supplementary laws contain detailed provisions, which include express recognition of the 'follow the fortunes' principle in reinsurance contracts, subject to the contractual terms agreed between the parties.55
Legislation in most countries in the region stipulates that reinsurance of local risks must be written subject to local law. As a general rule, it is therefore helpful for all parties, whether a local insurer or an international reinsurer, to accept that there is significant uncertainty when it comes to the interpretation of wording drafted in line with common law principles, such as those emanating from the London Market; for example, the use of terms such as 'condition precedent' will usually mean nothing to a local court.
A new wording with respect to the control clause in reinsurance contracts was agreed between the Chilean Insurance Association and Lloyd's in 2017, acknowledging the strength and credibility of the country's insurance market. Upon agreement of the clause by parties, reinsurers are now permitted to manage the adjusting process and the aftermath of the claims. This clause also provides assurance on the jurisdiction and governing law that should apply when resolving disputes arising from insurance contracts. Lloyd's opened a Miami office in September 2020 to complement its offices in Brazil, Colombia and Mexico.
In Chile, there is a requirement for all insurance and reinsurance matters to be determined within Chile. Naturally, this has led to reinsurance policies being issued subject to Chilean law and jurisdiction, although it is not known how Chilean courts would react to an express preference for a different law, such as that of England and Wales.
The position is similar in Brazil, which demands the use of Brazilian law and jurisdiction with the exception of arbitrations, which may be governed by any express law.
The governing principle under Colombian law is related to the place of performance of the contract.56 There is little doubt that this means any contract with a Colombian insured or insurer must be subject to Colombian law. The position in Mexico is less clear, despite the regulator's insistence that local law and jurisdiction must be used.
It is necessary that reinsurers carefully and explicitly express any deviations from the original policy, or the claims control options required, in the reinsurance policy and in accordance with rules specific to the jurisdiction.
VIII Outlook and conclusions
The challenges presented by the coronavirus pandemic are, in some ways, magnified in Latin America because of the complex economic and political environment. We have commented in previous editions of this chapter that political volatility risks undermining progress – now the recovery depends on strong government and clear economic policy.
When it comes to interpreting insurance contracts, there is strong consumer protection enshrining fair treatment of policyholders and this has been reflected in the regulatory response to the pandemic. In commercial insurance, there is a noticeable trend developing towards a more technical interpretation reflecting the wording of the contract. Governments and regulators will need to continue to modernise the markets to encourage growth and investment through enabling risk transfer. In jurisdictions with the right environment, there is an opportunity for insurers and reinsurers to offer new products and improved accessibility across all lines of business.
The comments in this chapter provide an overview of the current position in the main jurisdictions. The most important message is that each market is at a different stage of development and each requires close, individual analysis, in conjunction with an understanding of the political, economic and social context. In addition to consideration of the legislative regime, it is becoming more important to review court decisions and arbitration awards (where available) in determining the response of insurance and reinsurance contracts.
The Latin American market faces new challenges in 2021, as the region looks to recover from the coronavirus pandemic. The use of technology and digitalisation provides a way to increase accessibility of insurance products for consumers in areas such as life and healthcare. On the commercial side, there is also a need for innovation to provide solutions in areas such as cybersecurity and environmental liability, as well as in traditional lines such as D&O and property and casualty, to ensure that they are understood by companies across the full range of consumers and businesses.
1 Duncan Strachan is a partner and Kayleigh Stout is an associate at DAC Beachcroft LLP.
2 Financial Times article 'Latin America economy faces painful road back from coronavirus slump', Michael Stott, Latin America Editor, 14 January 2021.
3 OECD 'The dramatic Latin American crisis', José Antonio Ocampo, Professor at Columbia University, January 2021.
4 MAPFRE Economic Research, The Latin American Insurance Market in 2019, September 2020.
5 'Shaking the Latin American Equilibrium: The Petrobras & Odebrecht Corruption Scandals', Fordham Journal of Corporate & Financial Law, 4 November 2019.
7 Associated Press in Mexico City, as reported by The Guardian on 2 December 2018.
8 IMF (2020) A Joint Response for Latin America and the Caribbean to Counter the COVID-19 Crisis: Remarks by Managing Director Kristalina Georgieva at Conference of Latin American and Caribbean Leaders Organized by the Government of Spain.
9 Statista (2021) Mortality Rate due to coronavirus disease (COVID-19) in selected countries in Latin America and the Caribbean as of January 4, 2021 accessed at https://www.statista.com/statistics/1114603/latin-america-coronavirus-mortality-rate/.
10 New York Times (2020) Ecuador's Death Toll During Outbreak Is Among the Worst in the World accessed at https://www.nytimes.com/2020/04/23/world/americas/ecuador-deaths-coronavirus.html.
11 Aon (2020) Global Catastrophe Recap November 2020 accessed at http://thoughtleadership.aonbenfield.com//Documents/20201210_analytics-if-november-global-recap.pdf.
12 Aon (2020) Global Catastrophe Recap November 2020 accessed at http://thoughtleadership.aonbenfield.com//Documents/20201210_analytics-if-november-global-recap.pdf.
13 Karen Clark & Company (2020) Hurricane Delta – KCC Flash Estimate accessed at https://www.karenclarkandco.com/news/publications/pdf/KCC_LE_Delta_FlashEstimate_p20201012.pdf.
14 World Meteorological Organization (2020) State of the Global Climate in 2020 – Provisional Report accessed at https://mcusercontent.com/daf3c1527c528609c379f3c08/files/9d45cfd4-24dd-49b5-84d3-d84f7c0890d8/Draft_Statement.pdf.
15 Climatempo (2020) Nova lista das maiores temperaturas do Brasil accessed at https://www.climatempo.com.br/noticia/2020/10/09/nova-lista-das-maiores-temperaturas-do-brasil-6109.
16 Aon (2020) Global Catastrophe Recap October 2020 accessed at http://thoughtleadership.aon.com/documents/20201111_analytics-if-october-global-recap.pdf.
17 AON, 'Weather, Climate & Catastrophe Insight 2019 Annual Report'.
19 Costa Rica legislator calls for end to mining ban at Crucitas, bnamericas, 1 March 2021.
20 Created by Act No. 20,600 of 2012.
21 Chile protests drive doubling in commercial insurance costs, Reuters, 27 January 2020.
22 Draft Legislation No. 890/2020.
23 Emergency Decree 044-2019.
24 Circular 021 dated 5 July 2020.
25 Decree No. 10,270 of 6 March 2020 and Decree No. 9,755 of 11 April 2019.
26 Brazilian Personal Data Protection Law No. 13,709 of 2018 from Bill 53/2018.
27 National Decree No. 447/2019 of 28 June 2019.
28 Article 22 of the General Law of the Environment.
29 Bill No. 1,292/1995.
30 Bill No. 6,814/2017.
31 Insurance Law No. 20,667 came into force on 1 December 2013.
32 The unit of account, or Unidad de Fomento, constitutes an alternative currency that varies daily based on the previous month's inflation rate.
33 Ley de Bases del Medio Ambiente, Ley No. 19.300.
34 Legislative Decree 1341.
35 Article 543 of the Code of Commerce.
36 Bill No. 5,555 of 2004 and amendments.
37 Law No. 13,105.
38 Special Appeal No. 1,281,594 – SP.
39 Colombian Political Constitution 1991, Article 86.
40 STL521 – 2021(Rad. 91477).
41 Ministry of Finance Decree Project dated 18 September 2020.
42 Decree 403, Article 127 and accompanying Circular No.5, both dated 16 March 2020.
43 Memorandum No. 36805-2018.
44 No. 29946, principally Articles 105 and 109.
45 Mexico Civil Code, Articles 7.151 and 7.159 and Federal Civil Code of Mexico Article 1916.
46 Mexican Supreme Court Judgment, Amparo Directo 4332/2018.
47 Mexican Supreme Court judgment, 26 February 20914, Amparo Directo 30/2013.
48 Unidad de Medida y Actualización.
49 Statute Project n. 8.290/2014.
50 Draft Resolution for Public Consultation 18/2020 dated 21 August 2020.
51 Article 74 of the Insurance Contract Law.
52 Article 584.
53 Article 138 of the Insurance Contract Law No. 29,946.
54 Article 139.
55 Articles 1134 and 1136 of the Code of Commerce.
56 Article 869 of the Code of Commerce.